Direct and Indirect Taxes

Direct Taxes
As the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a
tax applied on individuals and organizations directly by the government e.g. income tax,
corporation tax, wealth tax, Estate Duty, Gift tax etc.

Definition:
A direct tax is really paid by the person on whom it is legally imposed.

-
Dalton

Direct Taxes are those taxes which cannot be shifted and which,therefore,fall directly on the
persons from whom the government extracts the payment.

-
Anatol Murad

Types of Direct taxes

1.Income Tax
Income Tax is paid by an individual based on his/her taxable income in a given financial year.
Under the Income Tax Act, the term individual also includes Hindu Undivided Families (HUFs),
Co-operative Societies, Trusts and any artificial judicial person. Taxable income refers to total
income minus applicable deductions and exemptions.Tax is payable if the taxable is above the
minimum taxable limit and is paid as per the differing rates announced for each tax slab for the
financial year.

2.Corporation Tax
Corporation Tax is paid by Companies and Businesses operating in India on the income earned
worldwide in a given financial year. The rates of taxation vary based on whether the company is
incorporated in India or abroad.

3. Wealth Tax
Wealth tax is applicable on individuals, HUFs or companies on the value of their assets in a
given financial year on the date of valuation. Wealth tax payable is 1% of the net value of taxable
wealth if it exceeds Rs 30 lakh as on valuation date for the financial year. The due date for filing
wealth tax return is the same as for income tax return.

Net wealth here includes, unproductive assets like cash in hand above Rs 50,000, second
residential property not rented out, cars, gold jewellery or bullion, boats, yachts, aircrafts or urban
land. It does not include productive assets like commercial property, stocks, bonds, fixed
deposits, mutual funds etc.

4. Capital Gains Tax

The profits made on sale of property are taxable under Capital Gains Tax. Property here includes
stocks, bonds, residential property, precious metals etc. It is taxed at two different rates based on how
long the property was owned by the taxpayer Short Term Capital Gains Tax and Long Term Capital
Gains Tax. This deciding period of ownership varies greatly for different classes of property.
Merits of Direct Taxes
1. The larger burden of the direct taxes falls on the rich people who have capacity to bear these and
the poor people with less ability to pay have to bear less burden.
2. Direct taxes are important instrument of reducing inequalities of income and wealth.
3. Unlike indirect taxes, direct taxes do not cause distortion in the allocation of resources. As a result
these leave the consumers better off as compared to indirect taxes.
4. Revenue elasticity of direct taxes, especially if they are of progressive type is quite high. As the
national income increases, the revenue on these taxes also rises a great deal.
5. Collection of these taxes are not expensive.The tax payer himself has to deposit these taxes with
the government.
6. These taxes are based on the principle of certainty. The tax payer knows how much
tax,when,where or how he has to pay.Even the government is certain to a large extent about the
revenue collected from these taxes.
Demerits of Direct Taxes
1. In the direct taxation, people are aware of their tax liability and therefore they would try to avoid
or even evade the taxes. The practice and possibility of tax evasion and avoidance is more in direct
taxes than in case of indirect taxes.
2. Direct taxes are generally payable in lump sum or even in advance and become quite inconvenient.
3. Another demerit of direct taxes is their supposed effect on the will to work and save. It is assessed
that work (given Income) and leisure are two alternatives before any taxpayer. If therefore, a tax is
imposed say on income, the taxpayer will find that the return from work has decreased as
compared with return from leisure. He therefore tries to substitute leisure for work.
4. Sometimes the collection of these taxes is very expensive.If there is a great number of people who
pay only small amounts as tax,the expenditure on the collection of the tax revenue will be
enormous.For example,land revenue in India is adirect tax.Since this tax is collected from millions
of farmers in small amounts of money,its collection is very expensive.
5. Such type of taxes may discourage capital formation.If the rate of these taxes is very high,it affects
saving adversely reducing the rate of capital formation.
6. These taxes are not popular because the tax payer has to bear their burden directly.These taxes
seem to be more oppressive.A lot of amount has to be paid in the form of these taxes.

Indirect Taxes
These are applied on the manufacture or sale of goods and services. These are initially paid to the
government by an intermediary, who then adds the amount of the tax paid to the value of the goods
/ services and passes on the total amount to the end user.Examples of these are sales tax,
service tax, excise duty etc.

Definition:
A indirect tax is imposed on one person,but paid partly or wholly by another.

-Dalton

AN indirect tax is demanded from the person in the expectation and intention that he shall
indemnify himself at the expense of another.

-J.S. Mill

Types of Indirect Taxes

1.Sales Tax
Sales Tax is charged on the sale of movable goods. It is collected by the Central Government in
case of inter-state sales (Central Sales Tax or CST) and by the State Government for intra-state
sales (Value Added Tax or VAT). The rates of taxation vary depending on the product type.
2. Service Tax
Service tax is applicable on all services provided in India except a specified negative list of
services that are exempt. It is paid by the service provider to the government who in turn collects
it from the end user by the service provider at the time of provision of such service. Service tax is
applied generally at the rate of 12.36%, which has been revised to 14% from April 2015. This
type of indirect tax is levied by the service tax provider and paid by the recipient of the services.
However, in some cases the liability for the tax is divided between the recipient as well as the
provider of service.

There is also a provision for abatement of service tax if the final price is a mixture of services as
well as material, such as restaurant bills. In general, restaurants levy service tax on 40% of the
bill amount as 60% of the amount is considered to be cost of materials. Service taxes fall under
the ambit of the central government.

3. Excise Duty
The tax imposed by the government on the manufacturer or producer on the production of some
items is called excise duty. The liability to pay excise duty is always on the manufacturer or
producer of goods. The duty being a duty on manufacture of goods, it is normally added to the
cost of goods, and is collected by the manufacturer from the buyer of goods. Therefore it is
called an indirect tax. This duty is now termed as Cenvat. There are three types of parties who
can be considered as manufacturers-

Those who personally manufacture the goods in question

Those who get the goods manufactured by employing hired labour
Those who get the goods manufactured by other parties For example, excise duty on the production of
sugar is an indirect tax because the manufacturers of sugar include the excise duty in the price and pass
it on to buyers. Ultimately it is the consumers on whom the incidence of excise duty on sugar falls, as
they will pay higher price for sugar than before the imposition of the tax.
In order to attract Excise duty liability, following four conditions must be fulfilled:

a) The duty is on goods.

b) The goods must be excisable

c) The goods must be manufactured or produced. d) Such manufacture or production must be

in India

Merits of Indirect Taxes

1. Indirect taxes are usually hidden in the prices of goods and services being transacted and, therefore
their presence is not felt so much.
2. If the indirect taxes are properly administered, the chances of tax evasion are less.
3. Indirect taxes are a powerful tool in molding the production and investment activities of the
economy i.e. they can guide the economy in its resource allocation.
4. Variety is found in these taxes. Every citizen of the country has to pay these taxes in one form or
the other.
5. By imposing these taxes on harmful goods such as wine,cigarettes etc. prices of these items can be
made prohibitive.It may check their consumption and save the society of their harmful affect.
6. These taxes are convenient. Taxes are paid only when goods are purchased.This tax is convenient
to the government also because the government realizes the amount of these taxes straight from
the producers or importers.
Demerits of Indirect taxes
1. It is claimed and very rightly that these taxes negate the principle of ability- to-pay and are therefore
unjust to the poor. Since one of the objectives is to collect enough revenue, they spread over to cover
the items, which are purchased generally by the poor. This makes them regressive in effect.
2. If indirect taxes are heavily imposed on the luxury items then this will only help partially because
taxing the luxuries alone will not yield adequate revenue for the State.
3. Direct taxes take away a part of the purchasing power of the taxpayer and that has the effect of
reducing demand and prices. On the other hand, indirect taxes are added to the sale prices of the taxed
goods without touching the purchasing power in the first place. The result is that in their case
inflationary forces are fed through higher prices, higher costs and wages and again higher prices.
Gross National Product -
GNP

What is 'Gross National Product - GNP'

Gross national product (GNP) is an estimate of total value of all the final
products and services produced in a given period by the means of production
owned by a country's residents. GNP is commonly calculated by taking the
sum of personal consumption expenditures, private domestic investment,
government expenditure, net exports, and any income earned by residents
from overseas investments, minus income earned within the domestic
economy by foreign residents. Net exports represent the difference between
what a country exports minus any imports of goods and services.

GNP is related to another important economic measure called gross domestic

product (GDP), which takes into account all output produced within a country's
borders regardless of who owns the means of production. GNP starts with
GDP, adds residents' investment income from overseas investments, and
subtracts foreign residents' investment income earned within a country.

BREAKING DOWN 'Gross National Product - GNP'

GNP measures the total monetary value of the total output produced by a
country's residents. Therefore, any output produced by foreign residents
within the country's borders must be excluded in calculations of GNP, while
any output produced by the country's residents outside of its borders must be
counted. GNP does not include intermediary goods and services to avoid
double-counting since they are already incorporated in the value of final
products and services.

The Difference Between GNP and GDP

GNP and GDP are very closely related concepts, and the main differences
between them comes from the fact that there may be companies owned by
foreign residents that produce goods in the country, and companies owned by
domestic residents that produce products for the rest of the world and
revert earned income to domestic residents. For example, there are a number
of foreign companies that produce products and services in the United States
and transfer any income earned to their foreign residents. Likewise, many
U.S. corporations produce goods and services outside of the U.S. borders
and earn profits for U.S. residents. If income earned by domestic
corporations outside of the United States exceeds income earned within
the United States by corporations owned by foreign residents, the U.S.
GNP is higher than its GDP.

While GDP is the most widely-followed measure of a country's economic

activity, GNP is still worth looking at because large differences between GNP
and GDP may indicate that a country is getting more engaged in international
trade , production or financial operations. Finally, real GNP may prove to be a
more useful measure, since it factors out any changes in national income
due to inflation. The real GNP takes nominal GNP measured in current prices
and adjusts for any changes in price level for goods and services included in
the calculation of GNP.
Net National Product - NNP

What is the 'Net National Product - NNP'

The net national product (NNP) is the monetary value of finished goods and
services produced by a country's citizens, whether overseas or resident, in the
time period being measured (i.e., the gross national product, or GNP) minus
the amount of GNP required to purchase new goods to maintain existing stock
(i.e., depreciation). Alternatively, the NNP can be calculated as
total payroll compensation plus net indirect tax on current production
plus operating surpluses.

BREAKING DOWN 'Net National Product - NNP'

NNP is the amount of goods that can be consumed within a nation each
year without reducing the amount that can be consumed in following years.

NNP provides an expression of the net value of the goods and services a
nation has produced during a specific time, often examined on an annual
basis as a way to measure a nations success in continuing minimum
production standards. The NNP is expressed in the currency of the nation it
represents. In the United States, the NNP would be expressed as a dollar
amount, whereas it would be expressed in euro for EU member nations,
such as Belgium.

The NNP can be extrapolated from the GNP by subtracting the depreciation
of any assets, also known as the capital consumption allowance, from its
total. The depreciation of asset's figure is determined by assessing the loss of
value of assets attributed to normal use and aging. The relationship between
a nation's GNP and NNP is similar to the relationship between its gross
domestic product (GDP) and net domestic product (NDP).

Understanding the Capital Consumption Allowance

The capital consumption allowance provides a mechanism to measure the
need to replace certain assets and resources to maintain a specified level of
national productivity. It is generally divided into two categories: physical capital
and human capital.
Physical capital can include real estate, machinery or any other tangible
resource used in the production of goods and services aside from the human
element. Human capital covers the skills, knowledge and abilities of a
workforce to produce goods and services, as well as the necessary training
or education that may be required to maintain production standards.

Physical capital experiences depreciation based on physical wear and tear,

while human capital experiences depreciation based on workforce turnover.

Net National Product and Environmental Economics

The NNP has particular usefulness in terms of environmental economics. It
provides a model relating to the depletion of natural resources, and it may be
used to determine whether certain activities are sustainable within a
particular environment.
Definition of National Income:
National income of a country means the sum total of incomes
earned by the citizens of that country during a given period, say
a year.

It should be noted that national income is not the sum of all

incomes earned by all citizens, but only those incomes which accrue
due to participation in the production process.

Individuals participate in the production process by

supplying factors of production which they possess.

There are four factors of production: natural resources or land;

human resources or labour; produced means of production or
capital; and entrepreneurs or organisation.

The payment for the use of land is called rent. Payment for the use
of labour is known as wages and payment for the use of capital is
known as interest. The factors of production land, labour and
capital are primary factors of production and their contractual
payments are called factor incomes. The surpluswhat is left after
the payment of these primary factors is called the profit. This
residual income is paid to the organiser of production as profit.

Thus, income for the participation in the production process may

take four forms: rent, wages, interest and profit. By national income
we mean the sum-total of all rent, wages, interest and profit earned
in the production process during a given period by all the citizens,
which is known as the factor payments total.

From this definition of national income, we exclude two types of

personal income. The first is transfer payments and the second is
capital gains. When a citizen receives a certain sum of money
without participating in the production process it is called
transfer payments. For example, the unemployment benefit,
income of a beggar, etc. are personal incomes but not national
income because they provide no services against their receipts.

Again, when we sell out assets which has appreciated in value, and
realise a gain it is known as capital gain which is excluded from the
calculation of national income because it renders no
productive service for reaping this gain.

Measurement Problems of National Income:

Problems arise in aggregation largely because of the difficulty of
finding an appropriate unit of measurement. In adding up the total
output of a country, there is no single physical unit of
measurement that can be used: the millions of different types of
goods and services are all measured in different units, for example,
steel is measured in tonnes and cloth is measured in metres and it
is, of course, impossible to add tonnes to metres!
The problem is partially overcome by using money as the unit of
measurement this greatly simplifies the adding up, but it gives
rise to the problem of distinguishing between real and nominal
values.

In addition, there are many problems of measuring national income

of an economy. These problems may be stated as follows: Firstly,
there is the problem of which goods and services should be
included. We know that gross domestic product (GDP) is the money
value of all goods and services currently produced within an
economy involving economic activity which means transforming
scarce resources to satisfy human wants.

We normally include those activities which generate goods and

services to be sold in the market for money. Thus, we exclude from
national income accounting all personal and household services
which do not pass through the market. This way of measuring is not
correct because this excludes all goods that are not sold in the
market. In a developing economy a substantial part of the national
income (or output) is not marketed and, hence, these products are
not included in the national income account.

The second problem is to exclude transfer payments and capital

gains from national income accounts. Receipts from illegal activities
should also be excluded from the national income calculation.

The third problem is associated with the valuation of inventories. The

general rule is that when a firm increases its inventory of goods,
this investment in inventory is counted both as past expenditure
and as part of income. Thus, production of inventory increases GDP
just as production for final sale does.

There are mainly two methods of valuation of inventories: the

market price method and the cost price method. In the market price
method imputed profits are included which are unlikely to be
realised in the same year. However, the cost price method does not
include imputed profit. Another problem of inventory valuation is
that the total quantity may remain the same, but this may not mean
that each individual item remains unchanged during the year.

Now, if prices are rising, the value of the new items are likely to
rise faster than the value of the old items. Similarly, if prices are
falling, the value of the new items are likely to fall less than that of
the old items. Moreover, even if the size of the inventories remains
unchanged its value is likely to change, an adjustment may be
necessary to take account of the effect of price change. The
adjustment is called the inventory valuation adjustment.

The fourth problem is imputed values of the non-market goods,

and services. Although most goods and services are valued at their
market prices when computing GDP, some are not sold in the
marketplace and, therefore, do not have market prices. If GDP is to
include the value of these goods and services, we must use an
estimate of their value. Such an estimate is called an imputed value.
One in which imputations are important is housing.

A person who rents a house is buying housing services and is

providing income for the landlord; the rent is part of GDP, both as
expenditure by the renter and as income of the landlord. However,
many people live in their own homes. Although they do not pay
rent to a landlord, they are enjoying housing services similar to
those of renters.

To take account of the housing services enjoyed by homeowners,

GDP includes (he rent that these homeowners pay to themselves. Of
course, homeowners do not in fact pay themselves this rent but the
market rent for a house could be imputed to be included in GDP.
This imputed rent is included both in the house-
owners expenditure and in the homeowners income.

Another area in which imputations arise is in valuing the services

provided by the government. For example, law and order, fire
fighters, defence, etc. provide services to the public. Measuring the
value of these services is difficult because they are not sold in the
marketplace and, therefore, do not have a market price. GDP
includes these services by valuing them at their cost. Thus, the
wages of these public servants are used as a measure of the value of
their output.

In many circumstances, an imputation is called for in principle but

is not made in practice. Since GDP includes the imputed rent on
owner-occupied houses, one might expect it also to include the
imputed rent on car, jewellery, and other durable goods owned by
households. Yet the value of these services is left out of GDP.

In addition, some of the output of the economy is produced and

consumed at home and never enters the marketplace. For example,
meals cooked at home arc similar to meals cooked at a restaurant,
yet the value- added in meals at home is left out of GDP.

Finally, no imputation is made for the value of goods and services

sold in the underground economy. The underground economy is
that part of the economy that people hide from the government
either because they wish to evade taxation or because the activity is
illegal. Since the imputations necessary for computing GDP are
only approximations, and since the value of many goods and
services is left out altogether, GDP is an imperfect measure of
economic activity.

These imperfections arc most problematic when comparing

standards of living across countries. The size of underground or
black economy varies from country to country. So long as the
magnitude of these imperfections remains fairly constant overtime,
GDP is useful for comparing economic activity from year to year.
What is 'Personal Income'
Personal income refers to all of the income collectively received by all of the
individuals or households in a country. Personal income includes compensation from
a number of sources including salaries, wages and bonuses received from
employment or self-employment; dividends and distributions received from
investments; rental receipts from real estate investments and profit-sharing from
businesses.

BREAKING DOWN 'Personal Income'

In some cases, people use the phrase personal income to refer to the total
compensation received by an individual. This is more aptly referred to as individual
income, and in most jurisdictions, personal income, also called individual income or
gross income, above a certain exemption threshold is subject to taxation.

Significance of Personal Income

Personal income has a large effect on consumer consumption, and since consumer
spending drives much of the economy, national statistical organizations, economists
and analysts track personal income on a quarterly or annual basis. For example, in
the United States, the Bureau of Economic Analysis (BEA) tracks personal income
statistics each month and compares it to numbers from the previous month. This
agency also breaks out the numbers into categories such as personal income
earned through employment wages, rental income, farming and sole proprietorship.
This allows the agency to make assertions about how earning trends are changing.

Personal Income Trends

Personal income tends to display a rising trend during periods of economic
expansion, and show a stagnant or slightly declining trend during recessionary times.
Since the 1980s, rapid economic growth in economies such as China, India and
Brazil has spurred substantial increases in personal incomes for millions of their
citizens.

Personal Income vs. Disposable Personal Income

Disposable personal income (DPI) refers to the amount of money a population has
left after taxes have been paid. It differs from personal income in that it takes taxes
into account. However, it's important to note that contributions to government social
insurance are not taken account when calculating personal income, and as a result,
only income taxes are removed from the personal income figure when calculating
disposable personal income.

Personal Income vs. Personal Consumption Expenditures

Personal income is often compared to personal consumption expenditures (PCE).
PCE measures the changes in the price of consumer goods and services. By taking
these changes into account, analysts can ascertain how changes in personal income
truly affect spending. To illustrate, if personal income increases significantly one
month but PCE also increases, consumers collectively may have more cash in
their pockets, but they may have to spend more on basic goods and services.
Difficulties in Measuring National Income in India
Difficulties in estimating national income in India are as follows:

Firstly, in India, most of the people are illiterate. They have no idea about the
method of keeping accounts.

Secondly, the large non-monetary sector of our economy also stands in the way of
the national income estimates. In India, it is very difficult to evaluated goods and
services in terms of money. For large portions of the commodities are not sold in the
market. They are mostly consumed by the producers.

Thirdly, another difficulty of estimating national income is that it is hardly possible

to find out a common measurable denominator of all economic activities of the
Indian people from the Prime Minister to the ordinary shop keeper.

Fifthly, the adequate statistical date which is helpful in one part of India cannot be
used in other parts of the country owing to regional diversities.

Sixthly, there is also the lack proper industrial classification so far as the
estimates of national income are concerned. This is due to the fact that the Indian
people are engaged simultaneously in different occupational services.

Lastly, in an underdeveloped country like India, the production of agriculture

and industry is unorganized. The producers have no through knowledge about
the quantity, quality and market value of the products. In most cases, the
agriculture sector has hardly and importance in the calculation of national
income.
Why did India adopt New Economic Policy
in 1991?
CBSE Class 11CBSE Class 11 Economics

In the middle of 1991, need for major economic reforms was felt in the country. These were ur-
gently needed to bring U-turn in the economy. It was mainly due to following reasons :
(i) Excessive fiscal deficit: In our planned eco-nomic development, anticipated expenditure was
always in excess of anticipated receipts resulting into fiscal deficit. It increased to 8.5% of GDP
in 1991 as against 5% in 1981-82. In order to meet this deficit, government had to make public
borrowings involving interest burden of borrowing.
(ii) Balance of payment deficit: Deficit in balance
of payment means when foreign payments are in excess of foreign receipts. In India, it mounted
from Rs.2214 crores in 1980-81 to Rs.17367 crores in 1990-91. To meet this deficit, government
had to depend upon external borrowings.
(iii) Rise in prices : After 1960-61, prices of all
commodities continued to rise. The situation became serious when the rate of inflation
arose from 6.7% to 16.7%.
(iv) Reduction in foreign exchange reserves :
At one time, during 1990-91, foreign exchange reserves fell to a lower level of ? 2400 crores,
which was just enough for the payments of three weeks imports. The crisis was so serious that
Chandra Shekhar government had to mortgage gold reserves with other countries to pay off
interest and foreign debts. It forced India to adopt a new set of measures to accumulate foreign
exchange reserves.
(v) Poor performance of public sector : Government of India expanded public sector in a j huge
way during 1951-1991, but their return was negligible. So, it was the need of the hour to shift it to
the private sector instead of public sector.
(vi) Gulf Crisis : Iran-Iraq warin 1990-91, is known as gulf-crisis. It led to a sharp rise in petrol
prices in the international market. Our exports to gulf countries fell sharply but there was a steep
rise in import bills. It made the balance of payment position further grim. It compelled the
government to introduce the new economic policy at this juncture.
 Liberalization, Privatization and Globalization in
India
The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of
economic reforms is commonly known as the LPG or Liberalisation, Privatisation and Globalisation model. The
primary objective of this model was to make the economy of India the fastest developing economy in the globe
with capabilities that help it match up with the biggest economies of the world.

The chain of reforms that took place with regards to business, manufacturing, and financial services
industries targeted at lifting the economy of the country to a more proficient level. These economic
reforms had influenced the overall economic growth of the country in a significant manner.

Liberalisation
Liberalisation refers to the slackening of government regulations. The economic liberalisation in
India denotes the continuing financial reforms which began since July 24, 1991.

Privatisation and Globalisation

Privatisation refers to the participation of private entities in businesses and services and transfer of
ownership from the public sector (or government) to the private sector as well. Globalisation stands for the
consolidation of the various economies of the world.

LPG and the Economic Reform Policy of India

Following its freedom on August 15, 1947, the Republic of India stuck to socialistic economic strategies.
In the 1980s, Rajiv Gandhi, the then Prime Minister of India, started a number of economic restructuring
measures. In 1991, the country experienced a balance of payments dilemma following the Gulf War and
the downfall of the erstwhile Soviet Union. The country had to make a deposit of 47 tons of gold to the
Bank of England and 20 tons to the Union Bank of Switzerland. This was necessary under a recovery pact
with the IMF or International Monetary Fund. Furthermore, the International Monetary Fund necessitated
India to assume a sequence of systematic economic reorganisations. Consequently, the then Prime Minister
of the country, P V Narasimha Rao initiated groundbreaking economic reforms. However, the Committee
formed by Narasimha Rao did not put into operation a number of reforms which the International
Monetary Fund looked for.

Dr Manmohan Singh, the present Prime Minister of India, was then the Finance Minister of the
Government of India. He assisted. Narasimha Rao and played a key role in implementing these reform
policies.

Narasimha Rao Committee's Recommendations

The recommendations of the Narasimha Rao Committee were as follows:

Bringing in the Security Regulations (Modified) and the SEBI Act of 1992 which rendered the legitimate
power to the Securities Exchange Board of India to record and control all the mediators in the capital
market.

Doing away with the Controller of Capital matters in 1992 that determined the rates and number of stocks
that companies were supposed to issue in the market.
 Launching of the National Stock Exchange in 1994 in the form of a computerised share buying and
selling system which acted as a tool to influence the restructuring of the other stock exchanges in the
country. By the year 1996, the National Stock Exchange surfaced as the biggest stock exchange in India.

In 1992, the equity markets of the country were made available for investment through overseas corporate
investors. The companies were allowed to raise funds from overseas markets through issuance of GDRs
or Global Depository Receipts.

Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the contribution of
international capital in business ventures or partnerships to 51 per cent from 40 per cent. In high priority
industries, 100 per cent international equity was allowed.

Cutting down duties from a mean level of 85 per cent to 25 per cent, and withdrawing quantitative
regulations. The rupee or the official Indian currency was turned into an exchangeable currency on
trading account.

Reorganisation of the methods for sanction of FDI in 35 sectors. The boundaries for international
investment and involvement were demarcated.

The outcome of these reorganisations can be estimated by the fact that the overall amount of overseas
investment (comprising portfolio investment, FDI, and investment collected from overseas equity capital
markets ) rose to $5.3 billion in 1995-1996 in the country) from a microscopic US $132 million in 1991-
1992. Narasimha Rao started industrial guideline changes with the production zones. He did away with the
License Raj, leaving just 18 sectors which required licensing. Control on industries was moderated.

Highlights of the LPG Policy

Given below are the salient highlights of the Liberalisation, Privatisation and Globalisation Policy in India:

Foreign Technology Agreements

Foreign Investment
MRTP Act, 1969 (Amended)
Industrial Licensing
Deregulation
Beginning of privatisation
Opportunities for overseas trade
Steps to regulate inflation
Tax reforms
Abolition of License -Permit Raj